As we enter 2022, the net lease market is working to digest a substantial amount of news, both good and bad. The RealtyRates.com quarterly Investor Survey includes national mortgage terms and interest rates, equity requirements, cap and discount rates, reserve requirements, and interim financing rates and terms for 32 income producing property types, plus financial indicators, historical cap rate trend data, and land lease cap and discount rates, likewise by property type. We recommend them to anyone needing any type of commercial real estate transaction and we further highly recommend them for any type of commercial financing. At First National Realty Partners, we have a significant amount of experience with net leased assets and a firm understanding of what drives cap rates for them. For individual investors who are interested in this asset class, partnering with a private equity firm is a good way to gain fractional ownership of institutional quality, net leased assets. The topic of financeability is complex and your legal experts will need to wade through the various intricacies. As we look ahead, the trajectory of the pandemic and vaccine rollout will undoubtedly shape the 2021 economic landscape. This requires special endorsements to the regular owners policy. Why do lenders have an adverse reaction to ground leases around year 39? On one hand, interest rates are rising. Assets America was incredibly helpful and professional in assisting us in purchasing our property. Average cap rates for single-tenant industrial assets have compressed substantially in recent years, falling more than 100 basis points since the mid-2010s. Note that the model currently only allows for an interest-only loan. Using a market capitalization rate of 9.00 percent indicates that net income of $13.43/SF would need to be achieved to justify an investment of $149.26/SF ($149.26 x .09 = $13.43); assuming vacancy and collection loss of five percent, an absolute net rental rate of $14.14/SF would be needed to achieve this level of net income ($13.43 0.95). While Q1 saw the number of big box trades increase to 6, from 2 in Q4, diminished activity is expected to continue through 2021 as owners are tasked with trying to resolve big box space use options. This will allow you to earn income and possibly capital gains. The latest wave of Covid is also likely to prompt an economic slowdown as some restaurants and retails have had to shut locations or reduce hours as they cope with staff and inventory shortages. As an alternative, a ground lease could theoretically refer to some objective third-party index for long-term capitalization rates for real estate investments at the time of the rent reset. Great experience with Assets America. Average Cap Rate 3.60% 12 mo avg with 10+ yr lease term Average Property & Lease Credit Rating Average Cap Rate Trend 4.0% 2021 3.63% 2022 Rates reflect last 12 mos, short and long-term Recent Sales Comps Tenant News Featured Tenant Profiles Circle K Walgreens Pharmacy 5.00% Pizza Hut Avg. The RealtyRates.com quarterly Developer Survey includes actual and pro-forma discount rates for 22 sell-out property types including subdivisions, PUDs, business and industrial parks, and residential and commercial condominiums and co-ops. As the formula above suggests, there is a direct relationship between a propertys cap rate and its value. However, this may conflict with the standard wording of a ground lease, which gives some control to the lessor. Market activity greatly surpassed expectations in fourth quarter 2020 as investors rushed to close deals before year-end. This additional aid to funds is expected to boost economic growth and push up both inflation and interest rates. To do so, we compiled the following average summary reports for a number of data points throughout each mentioned sector. Note: this report captures data only for transactions which have reported a sale price and capitalization rate. This represented a 12 basis point decrease when compared to the prior year. Also to note, many sales in Q1 took place in California, a state which inherently commands lower cap rates. 10-Year Treasury Note | Expected to rise to 2.1% in 2022, up from the current rate of 1.52%. They were our One-Stop-Shop. *Market totals represent the studys sample sizes for select industries and are not indicative of all retail sales that occurred for all of 2021. Inflation closed out the year at 6.8%, the highest seen since 1982. The single-tenant industrial sector is on pace to have its best year ever. Safer assets with high quality tenants like Walgreens, Dollar General, Amazon, Whole Foods, or McDonalds on long term leases are the gold standard for safety in a turbulent market so they may be less exposed to cap rate movement. Cap rates in Q1 compressed 3bps compared to Q4. UNITED STATES HQ8144 Walnut Hill Lane, Suite 1200Dallas, TX 75231. A propertys capitalization rate is a performance metric that provides real estate investors with information about its potential return on investment and risk profile. 10-Year Treasury Note | expected to rise to near 2% in 2021, up from the current rate of 1.1%* This increase could create challenges for buyers to obtain ideal financing. Inflation | expected to rise 2.7% in 2021, up from 1.7% in 2020*, GDP | expected to grow 6.2% in 2021, up from -5.8% growth in 2020*. Industrial outdoor storage facilities are gaining interest with investors, and last mile distribution hubs remain a top favorite. Starbucks concept is to sell decommissioned shipping containers as an environmentally friendly alternative to conventional construction. Investors targeting properties in the bank sector are cognizant of the everchanging banking environment related to mobile banking and the evolving branch footprints. In fourth quarter, activity reached $18.3 billion, representing a 37 percent jump from the previous quarter and a 38 percent increase from fourth quarter 2020. As schools continue to open and/or close their campuses to students, cap rates for educational/childcare NNN properties increased into the 7% range at 7.26% in Q4 with average lease terms recording at 12 years. Founded in 1997, the firm has closed over $6 billion of net lease property transactions. Figure 1 shows the degree to which multifamily and industrial yields dominate the lower end of the pricing curve. These brands and others in the industry alike have been able to quickly adapt to customer demand by space remodeling, adding drive-thru to permitted spaces and provide in-app and delivery orders. Today's low interest/cap rate environment enables parties to fix rent in a stable, long-term fashion. His hard work was never ending until the job was done. In Q4 its especially important to understand the impact the ongoing pandemic and overall market conditions have had on the relationship between length of lease term and capitalization rates across all product types as well as the effect on buyer bias toward certain sectors. More than $8.4 billion in investment sales were reported over the last three months, jumping 20 percent from the previous quarter and 72 percent from this time last year. Cap rates are holding steady with rates inflating just 5bps in 1Q. Despite the substantial shifts in consumer spending in 2020 and beginning of 2021 caused by COVID-19, US Retail and Food Service increased by 27.7% YOY as of March 2021, proving the resilience of the overall retail industry. Cap Rates in 4Q21. In this way, the lender can more easily sell the leasehold in case of default. But buyer demand is strong across virtually all industrial subtypes. : Net leased properties should be conservatively underwritten with manageable debt loads that have fixed interest rates, strong locations, and high quality tenants. Retail profit margins are expected to hit a high of 13% in 2021 as retailers are being challenged with an imbalance of demand and available inventory due supply chain issues. patrick.nutt@srsre.com. For example, if the lessee takes a 30-year mortgage on its improvements, the lease term will run for at least 35 to 40 years. However, fast food ground leases with shorter amortization periods might have a 20-year lease term. To that point, net lease cap rates and their trends are driven by anything that increases or decreases the level of risk associated with the property. Another feature is for the lessor to assist the lessee in obtaining necessary licenses, permits and zoning variances. : Properties with longer term leases have less risk (lower cap rates) than properties with short term leases. Ronny at Assets America has been invaluable to us and definitely is tops in his field. A low cap rate means higher value and a high cap rate means lower value. Having them on our team meant that we could always receive truthful, timely and accurate answers to our questions. They handled a complex lease and guided us through entire process, including the paperwork. Get instant access to all of our current and past commercial real estate deals. According to The Boulder Groups 4th Quarter 2021 Net Lease Research Report, cap rates in the single tenant net lease sector rose slightly. We were thankful for how promptly and consistently they kept us informed and up to date on each step of our journey. Given the essential nature of the grocery sector that provides a safe and stable recession resistant asset, investors continue to look at this sector as stable cash flow. We expect to see more of the same in quarters moving forward as developers and investors seek sites suitable for and/or equipped with new drive-thru prototypes for these brands. The impact of the pandemic forced the banking industry to dive into new digital banking transformation as bank branches continue to pivot to new business models. Cap rates for Q4 recorded at 5.64% while the average lease term increased to 10 years from 8 years in Q3. The good news is that the unemployment rate is falling to historic lows, the government is set to invest a record amount in national infrastructure, and wages are rising across the board for workers as companies compete for talent. We can help finance the purchase, construction, or renovation of commercial property through our network of private investors and banks. which we must have to create or renew your subscription. They obtained fantastic, low, fixed rate insurance money for us. When viewed through this lens, the year to year cap rate is much less important than investing in a net leased property with strong fundamentals. In the retail sector, they inched up a few basis points to an average cap rate of 5.88% and in the industrial sector they averaged 6.77%. However, riskier triple net assets those with short term leases or less desirable tenants are more likely to feel the brunt of this move. Currently, the average cap rate for net lease industrial sits at 5.8 percent. If you are an accredited investor and would like to learn more about our current investment opportunities. In the retail sector, they inched up a few basis points to an average cap rate of 5.88% and in the industrial sector they averaged 6.77%. However, short term leases with strong underlying real estate fundamentals will be in demand amongst certain investors who are willing to take on more risk through potential re-tenanting or redevelopment of a property., To view the full report: https://bouldergroup.com/media/pdf/Net-Lease-Bank-Ground-Lease-Report.pdf. General retail sectors include fitness, hardware, furniture, home goods, cellular stores and other retail types which do not fall under one of the other focused sectors. If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information. , cap rates in the single tenant net lease sector rose slightly. who want exposure to commercial real estate assets, but not the hassle of managing them on a day to day basis. In just the last year, weve seen a 14-basis point decrease, and rates have been below the 6.0 percent mark for six consecutive quarters. The big box sector within net lease continues to see diminished activity due to the pressure of online consumer spending, evolving smaller square footage footprints and business restructure. Consumer sentiment in November fell to its lowest level since 2011, measuring 66.8. The properties most likely to be impacted are those at the higher end of the risk spectrum. The average lease rate for all ground leases in our database in 2022 is just under $1,300/mo. Investor Survey. The rent escalation clause provided for a 10% rent increase every five years. First National Realty Partners is one of the countrys leading private equity commercial real estate investment firms. Ive worked with this company for decades. Since the beginning of the pandemic, average cap rates have slipped into the high 5.0 percent range and at mid-year 2021, sat at 5.9 percent. The CRS captures 3,600 cap rate estimates across more than 50 geographic markets to generate key insights from a wealth of data. Once the lease expires, the lessor becomes responsible for paying the property taxes. One way to extract value from the land is to sign a ground lease. Expect this sector to continue to outperform other sectors as flight to safety and recession resistance remains to be a target for investors. The company is very capable, I would recommend Assets America to any company requiring commercial financing. We'd love to get in touch with you about how we can assist you with your retail real estate needs. This sector consists largely of credit-worthy brands like Panera Bread and Chipotle. Normally, the lessee will want a term that is 5 to 10 years longer than the loan amortization schedule. The firm provides a full range of brokerage, research, advisory, and financing services nationwide. %%EOF : A high quality tenant like a national company with a strong credit rating comes with less credit risk, which pushes the cap rate lower. The lenders requirements for applying the condemnation proceeds and controlling termination rights mirror those for casualty events. With more than $27.5 billion in sales already reported, even a lower than average fourth quarter could make 2021s annual volume the sectors new high-water mark. Bank properties with the longest leases typically display attractive traits including relocation branches and modern prototypes. CVS assets have seen an increase in trades as investors seek out to both purchase and sell quality sites in the wake of the brand announcing they will be closing 900 stores, starting in the Spring 2022. The demand on the educational sector has been changing and evolving due to the impact of COVID-19. Beyond the arrangements for paying rent, a ground lease has several unique features. In addition to the real estate lease, Assets America utilized their decades-long financial expertise to negotiate fantastic rates and terms on our large and very unique multimillion dollar equipment purchase/lease. The also include absolute leases, percentage leases, and the subject of this article, ground leases. Despite inflation levels, consumers have more disposal income from post pandemic savings and federal stimulus payments. For a 2-bedroom apartment in Istanbul, you can expect to pay anywhere between 1,850TL (467) and 2,500TL (631) in expensive areas and between 1,000TL (252) and 1,900TL (479) in cheaper districts. As the previous paragraph described, they rose slightly in 4Q21, but at the outset of 2022, there is some uncertainty about what will happen. Despite banks being challenged with keeping their distribution channels open due to social distancing logistics and compliance functions that were never designed for remote work, the average cap rate for bank properties sold in Q1 compressed by 50 bps compared to Q4 while average lease term increased by just 3 years. In a gross lease, the commercial property owner pays for them. Our experienced team provides unique insight to the net lease industry. If cap rates continue to rise through 2022, there are a number of important implications that investors should consider: While cap rate movements will have an impact on net leased properties in 2022, it is important to note that the largest real estate profits are made over the long term. Secondary. Data is distributed amongst 13 regions encompassing all 50 states as well as Puerto Rico, Guam and the U.S. Virgin Islands. , the tenant pays base rent plus all of the costs associated with running the property. As an example of a ground lease, consider one signed for a Starbucks drive-through shipping container store in Portland. While portfolio sales have been leading contributors to overall volume, we continue to see very robust levels of single-asset sales as investors chase well-located, high-quality, newly built facilities across the distribution, cold storage and last-mile sectors, among others. By 2022, ALDI will bring its total number of US stores to nearly 2,500. www.aldi.us Average Cap Rate 4.18% 12 mo avg with 10+ yr lease term Average Property & Lease Credit Rating Average Cap Rate Trend 4.65% 2021 4.35% 2022 Rates reflect last 12 mos, short and long-term Recent Sales Comps In particular, the so-called risk free rate on the 10-year US Treasury has risen from 1.08% to ~1.70% in the first few weeks of 2022, the fastest increase in nearly 20 years. We were very pleased with Assets Americas expertise and prompt response to our inquiry. 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